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Major Sources of Oligopoly

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Strategic Business Management - Microeconomics

加州大学尔湾分校

4.7（38 個評分） | 4K 名學生已註冊

This course weds business strategy with the principles of microeconomics. It offers valuable a powerful toolbox together with cases and lessons across all major functions of business, management, from finance, operations management, and marketing to human resource management, organizational behavior, statistics, and, of course, business strategy.

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4.7（38 個評分）

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PT

May 25, 2019

very professional development of the course videos, and the professor is very didactic.

FM

Apr 13, 2018

Excellent course.\n\nVery well taught, great visuals and interesting subject matter.

從本節課中

Oligopoly and Strategic Management

Oligopoly Defined; Strategic Interactions and Mutual Dependence Recognized7:59

Major Sources of Oligopoly11:19

Market Power and Action; Cooperative vs. Non-Cooperative Behavior; Explicit Collusion8:25

Tacit vs. Explicit Collusion; Forms of Tacit Collusion; Models of Oligopoly Conduct4:14

Joint Profit Maximization Model; Why Cartels Can Fail; Price Leadership Model8:47

Game Theory and the Prisoner’s Dilemma; The Payoff Matrix; The Nash Equilibrium15:58

教學方

Dr. Peter Navarro
Professor

腳本

[MUSIC]

In this module,

let's run through a checklist of all of the various sources of oligopoly,

all of which relate to a key concept we have already discussed within the context

of monopoly, namely, the key concept of barriers to entry into the market.

The intuition here is that if there are high barriers to entry into a market,

this makes it easier for

a small number of large firms to maintain their oligopolistic power.

So what are the barriers to entry we want to discuss?

Well, the big four are economies of scale, large capital requirements,

some absolute cost advantage a firm may enjoy because of things like patents or

trade secrets, or preferential access to raw materials, and

finally, our by now old friend of product differentiation.

[MUSIC]

The story about economies of scale leading to oligopoly is a story very

similar to that for natural monopoly, just with a bit of a more subtle twist.

We call it the monopoly,

average cost decreased throughout the relevant range of production.

This allowed one big firm to eventually be able to drive out all other

firms by producing its lowest cost.

With oligopoly, here is the subtle twist, it is a few firms

rather than just one single firm that drives other firms out of the industry.

This problem is illustrated in this figure.

It shows the average total cost curve for an oligopolistic industry.

In the figure, the relevant range of output extends to point D,

since this reflects total industry output, total sales.

At the same time, between points C and D, there are constant returns to scale,

whereas between point A and C, there are decrease in returns to scale.

This clearly implies that the minimum efficient scale for

a firm in this industry is a plant size of AC which, in this example,

equals one third of the total output AD.

And by the way, you may recall from the lesson four that the minimum efficient

skill is defined as the smallest level of output at which a firm

can minimize long-run average cost.

In the case of natural monopolies like the railroads and utilities,

small firms can not realize the MES, the minimum efficient scale.

So there is only one seller but you should see here from the figure

that a large minimum efficient scale can also give rise to oligopoly.

Now, let's assume that there are three big firms in this industry and

all produce an output of AC at their minimum efficient scale and

yes, with an equal share of the market.

And note here, this key definition, market share,

is defined as the percentage of market output produced by a single firm.

Now, study this figure carefully, can you see the dilemma for

a new firm trying to enter this industry?

Please pause the presentation now and jot down a sentence or

two as to the nature of this dilemma and why it leads to oligopoly.

So here's the dilemma, if a new firm tries to enter the industry

at a plant size less than the minimum efficient scale, say,

at output A-B, that firm will be a higher cost producer than its rivals.

In this situation, that higher cost firm will be highly vulnerable

to be driven out of the industry by its competitors.

In fact, all its rivals need to do is set price below the new firm's cost for

a while and cause it to incur heavy losses.

While that will temporarily really reduce the oligopoly profits earn,

this type of predatory pricing will force the high cost firm to withdraw from

the market after which prices can once again be raised.

But that is not the high cost firm's only option.

Alternatively, the firm can choose to build a plant size at the minimum

efficient scale to allow it to be competitive.

However, if a firm does so, it will have to seize a sizeable market share from its

oligopolistic rivals to achieve efficient production.

In particular, in our example, it would have to cut each of its

rivals back from a third to a fourth of the national market and

the likely result would be losses for all of the firms.

So given this dilemma, it is perhaps not surprising that scale-economy

barriers do indeed deter entry into the industry and

help preserve the oligopolistic market structure.

[MUSIC]

A closely related barrier to entry that helps perpetuate oligopoly as a market

structure is that of large capital requirements that might be needed to enter

the industry.

Such large capital requirements characterize heavy industries like autos

and steel and petroleum refining.

In each of these industries, it simply requires a lot of capital investment

to set up the elaborate plant and equipment necessary to efficiently and

effectively produce one's products.

In this case, the broader problem is that established firms with a track record

may have better access to lower cost capital than new entrants.

For example, a large existing firm with an established reputation will likely

be able to borrow money that has significantly lower interest rate than

a new firm without a track record.

[MUSIC]

Still, a third important barrier to entry has to do with absolute cost

advantages as illustrated in this figure.

The idea here is that a firm in an industry may have some inherent

cost advantage that no other rival can offset.

As how a firm may gain such an absolute cost advantage, there are three main

possibilities, patents, trade secrets, and preferential access to raw materials.

So what's a patent?

In this key definition, a patent is a government license that gives the inventor

of a product or process or idea the right to manufacture, sell, or

use that invention over a specific period of time, often several decades or

more depending on the country of origin.

Historically, one of the most valuable set of patents has been those developed

by the American firm Qualcomm, from mobile communications technologies,

such as CDMA and YMAX.

Because it owns these patents,

Qualcomm can charge a royalty rate to other entrants into the market.

Some big companies choose not to patent their intellectual capital, and

thereby, reveal to a world in which that intellectual capital might be pirated.

Instead, these big companies maintain their intellectual capital in

a portfolio of trade secrets where, in another key definition,

a trade secret is defined as a design, formula, pattern, process, practice,

or commercial method used by a firm to obtain a cost advantage over competitors.

So can you think of one of the best kept trade secrets in the world?

Well, that would be the recipe and secret ingredient for

the world's most popular carbonated sugar water, that would be Coca-Cola,

loved by dentists and small children everywhere around the globe.

In fact, in business, you'll often be confronted with the choice

of whether the patent your intellectual capital or maintain it as a trade secret.

It's a big choice that must weigh the risks of piracy against

the ability to charge royalties for the use of that intellectual capital or

simply keep it for your exclusive use.

[MUSIC]

As a final major source of absolute cost advantage,

there is the issue of who owns or controls the basic raw materials for a product.

It is this particular type of absolute cost advantage barrier that explains, for

example, the historic maintenance of the aluminum industry's oligopoly.

With America's Alcoa, Canada's Rio Tinto Alcan, and Russia's Rusal,

controlling much of the world's high grade box reserves used in aluminum production.

[MUSIC]

As a fourth important barrier to entry that could contribute to the existence

of oligopoly, there is our, by now old friend, product differentiation,

which we discussed in the last lesson at length within the context of

monopolistic competition.

The basic idea here is this.

To the extent that a firm has built up an established brand name with

consumers over the years and decades, often spending millions or

hundreds of millions of advertising dollars in the process, that firm has

a distinct cost advantage over any other new firms entering the market.

Just think about it from a marketing perspective.

How would your news startup firm be able to compete with established brand names

like Apple or Disney or McDonald's or General Electric or Walmart?

The answer is you wouldn't, unless of course your firm was willing

to incur substantial advertising costs to gain a foothole in the market, a prospect

that often helps to deter market entry and maintain the existing oligopoly.

So the bottomline here is that barriers to entry play a very important role

in creating and sustaining oligopolistic industries.

Our next question, of course,

is why should we worry about this particular market structure?

And the answer, explored in our next module,

lies in better understanding the concepts of market power and market concentration.

[MUSIC]

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